New Trading Curbs: Limit Up, Limit Down is Finally Here

Limit up, limit down is finally here. On Monday, April 8th all stock exchanges will begin a rollout of a new series of "circuit breakers" designed to calm markets during high volatility.

Known as "limit up, limit down" (LULD), it will replace the old single-stock circuit breakers as well as the NYSE's own liquidity replenishment points (LRP).

What's new? The old single-stock circuit breakers were designed to halt trading in a stock for five minutes if it moved more than 10 percent from its price in the previous five minutes.

The problem: an administrative mess as a lot of stocks were halted, and there were often many erroneous trades that needed to be cancelled.

LULD is a refinement on this: it is designed to prevent trading outside of specific price bands, while allowing the stock to continue to trade within those bands.

The result (hopefully): far fewer stocks will be halted and far fewer erroneous trades.

Here's a simplified example. Suppose a stock trading at $10 drops five percent in five minutes, to $9.50. Under LULD, the stock would be halted for five minutes if it trades at $9.50 for 15 seconds, but would remain open for trading if it traded above $9.50.

The rollout on Monday will include part of the S&P 500 and Russell 1000 and will be fully rolled out for both indices within a week or so. It will also include selected Exchange Traded Products (ETPs).

No protection in the open nor the close. One other point: the LULD's will initially only operate between 9:45 a.m. to 3:30 p.m.; there will be no LULD from 9:30-9:45 a.m. and 3:30-4:00 p.m.

A Phase II that begins in October will expand the time LULD's operate to the full trading day, from 9:30 a.m. to 4:00 p.m.

Why is that? My sense is that the SEC wanted the exchanges to have some operational experience before they got the LULD involved in the critical opening and closing periods.

But that leaves the open and the close with virtually no circuit breakers. If things go crazy...for whatever reason...there is nothing to slow the market down.